Israel is to continue construction inside existing Jewish settlements, an official said today, despite a clear call from the US secretary of state, Hillary Clinton, for a halt to all settlement growth.

Deepening differences are emerging between Israel's new government, led by the prime minister, Binyamin Netanyahu, and the US administration, which has adopted a tougher position over Israel's actions towards the Palestinians than in the past.

Concern over settlements, which are home to nearly 500,000 Israelis in east Jerusalem and the West Bank, will dominate a meeting in Washington today between Barack Obama and Mahmoud Abbas, the Palestinian president.

Israel has said it will not build new settlements and is committed to removing settlement outposts that are not authorised by the government. However, Mark Regev, a spokesman for Netanyahu, said today that "normal life" would be allowed to continue inside existing settlements, which included new construction such as enlarging homes and building schools to accommodate growing families.

Israel believed that all sides should "in parallel move forward in implementing their obligations" under the peace process, Regev said. "As to existing settlements, their fate will be determined in final status talks between Israelis and Palestinians and in the interim we believe that normal life should continue in these communities. "Activity inside existing communities does not pre-judge any final status arrangements between Israel and the Palestinians."

His words mirror comments from Netanyahu this week in an Israeli cabinet meeting, when he said it "wouldn't be fair to ban construction to meet the needs of natural growth". Natural growth is taken to mean constructing new homes and other buildings in settlements to meet the demands of growing families.

However, the 2003 US road map explicitly calls for a freeze on all settlement activity, including natural growth. Settlements on occupied land are illegal under international law. Palestinian negotiators have said talks with Israel cannot restart without an end to settlement expansion.

Yesterday, Clinton issued an unusually blunt call for a halt to settlement growth. She said Obama "wants to see a stop to settlements – not some settlements, not outposts, not natural growth exceptions. We think it is in the best interests of the effort that we are engaged in that settlement expansion cease." She said the Americans "intend to press that point".

US and Israeli officials have been meeting for talks, including in London this week. Netanyahu has consistently argued that Iran and its nuclear programme represents the most pressing challenge for Israel and should take priority over negotiations with the Palestinians. He has refused even to talk of a two-state solution to the Israeli-Palestinian conflict.

However, with Obama due to make a key speech to the Muslim world from Cairo next week, Washington appears to be stepping up pressure on Israel to make concessions towards the Palestinians to allow a peace process to restart.